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A strategic approach to bank simplification

A strategic approach to bank simplification

As banks face a myriad of complexities, including changing customer demands and regulations, they need to focus on simplifying their model and becoming a truly connected enterprise.

Hessel Verbeek

Partner, KPMG Strategy | National Leader, Mutual Banks

KPMG Australia


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For the vast majority of Australia’s banks, complexity is a major strategic and operational challenge in the delivery of customer, regulatory and organisational (efficiency, agility and culture) outcomes.

However, while banks recognise the need to simplify their approach, it is exactly their high degree of complexity that stops them from pursuing simplification with more vigour.

Therefore, a logical and systematic approach is required to create bank simplification – to get started and to maintain momentum.

An environment of challenge

The Australian banking industry is facing a confluence of factors, making simplification vital, but also complex.

These include evolving customer preferences, increasing and new forms of competition, a converging sector focus, slowing credit growth, a continued low interest rate environment, increased policy and regulatory reforms, and the need to provide greater transparency to re-build trust.

These changes are forcing banks to confront their strategies and operating models. Without change, incumbent banks will struggle to meet shareholder, customer and regulatory expectations.

Bank simplification

The target state for bank simplification is a ‘connected enterprise’, which is entirely organised around customer needs and is omni-channel, but with a digital focus. This bank is streamlined from front-to-back, with every process putting the customer at the core. It is not organised in product or channel siloes, has no legacy restrictions, and is open to the outside world.

A simplification roadmap will be distinct for each bank, depending on its strategic objectives and on its current state. The five step bank simplification approach outlined below defines how a bank can arrive at a ‘connected enterprise’.

Five steps to simplification

Step 1

Clarify the bank’s strategic focus (e.g. customer experience, value, ease, innovation) and make clear choices around competitive positioning. This will drive choices around the bank’s architecture and operating model.

Step 2

Choose a direction for the bank’s business architecture (e.g. organisation of customer journeys, distribution and operations). Many banks are organised along product and channel lines, giving rise to siloes, which need to be broken down.

Typical considerations for business architecture include:

  • Customers journeys, segments and product needs
  • Sales and service approach (e.g. by channel vs integrated) and incentivisation (e.g. profit or cost centre)
  • Multi-brand management and fulfilment
  • High level systems architecture
  • Operations and technology, including centralised services between bank divisions.

Step 3

Determine which activities are strategic and provide a competitive advantage, given the bank’s agreed focus in the first step. This will drive choices around which activities should be retained in-house, and which could be outsourced.

Step 4

Assess the simplification options for the bank’s activities, in line with its strategic focus, its business architecture and the (strategic) nature of its activities. Four main options should be considered for each activity:

  • CoE creation – Leverage current capabilities with potential for high performance. This is likely to be the adoption of a current Centre of Excellence (CoE) for the wider bank (e.g. migrating all secured and unsecured consumer credit assessments to the state-of-the-art mortgage credit assessment platform).
  • Transformation – Transform existing assets/capabilities that are not restricted by legacy issues (e.g. HR management supported by a newly implemented cloud-based ERP system).
  • Development for replacement – Build a new unconstrained capability, to take over activities with too many legacy issues to be transformed (e.g. full replacement of bank-wide data and analytics functions by a central hub).
  • Third-party solutions (including partnering/outsourcing) – Consider third-party solutions for non-strategic activities that are not high performing (e.g. ATM network operation for a digital bank). Decisions should be based on reduction of complexity, organisational rigidity or risk, rather than on productivity alone.

An increasingly attractive alternative to transforming existing bank activities is the establishment of a new (low cost) direct bank within the group. Provided that there are opportunities for platform convergence (e.g. development on a shared core banking system), this approach can allow the bank to develop, test and mature future capabilities for the existing bank. The existing bank could either use these capabilities as-a-service, or adopt them as replacements. This is a client-centric cost-efficient approach to bank simplification.

Step 5

The fifth and final step is to develop the simplification roadmap, taking into account various dependencies. The roadmap will be bespoke for every bank, given their vast differences in starting position, strategic activities and simplification options.

RBS in the UK is an example of a major incumbent bank combining several of these simplification options into a single strategy. In the last 5 years, RBS (which struggled with complexity and operational issues, including as a result from a failure to fully integrate systems following the 2000 merger with NatWest) embarked on a journey that combined radical rationalisation (e.g. more than halving the number of technology systems and applications) with the creation of disruptors (a number of newly created digital consumer and small business banks) within the group. It is tying this together by creating group-wide assets and capabilities (such as a customer data lake) across its legacy and new businesses. The results from this simplification are not just a better customer and financial performance, but also vastly improved operational resilience and agility.

Simplification journeys

Adopting these five steps will result in very different strategic choices for different banks. Here are three potential outcomes:

1. Full-service bank with a focus on mass-affluent customers and small business

The full-service bank will organise itself to be responsive to customers, and to maintain full control of all activities that impact the customer. In its simplification journey, it is likely to focus on extending existing centres of excellence, as well as transformation of existing capabilities.

Simplification will be achieved by the removal of siloes and the rationalisation of bank-wide activities (including products, systems and processes), including migration to automated processes. Its transformation pace will be measured, out of risk considerations.

2. Mainstream bank with a ‘value’ strategy

The value-focused bank will be focused on simplicity and efficiency. It will be more likely to develop-to-replace (including through a neobank) or adopt third-party solutions. A critical factor in enabling this more aggressive approach to simplification is a relatively radical focus on rationalisation (especially of products and channels).

3. Large bank repositioning itself as an embedded finance institution

For example, providing access to the bank when and where the customer needs it, rather than putting the bank behind a firewall. The embedded finance bank will open itself to an eco-system of partners (e.g. social media platforms, ecommerce, retail partners, fintechs), and partnering will be a strategic activity. It is likely to replace rather than transform many of its banking modules, as it needs to keep pace with rapidly evolving standards. It will need to simplify fast, in order to stay ahead of challengers.

Starting now

Given the priority and urgency, banks should start planning for simplification immediately. The planning process requires management and Board focus.

It starts with determining the bank’s long-term strategic focus. This could be done concurrently with a maturity assessment of the bank’s existing activities. These two preparation steps provide the basis for a blueprint of (strategic) activities and the identification of high-level simplification options for each. This planning work also lets the bank determine its prioritisation of areas of the bank for simplification.

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